Published: Mon, 02 Mar 2009 16:47:21 +0100

USD/CAD Rising Higher as Banking Concerns Grip Markets

(CEP News) USD/CAD is getting some support from weaker equity markets as banking problems continue to stoke fear sentiment.

Weaker North American stocks are providing broad momentum to the U.S. dollar and helping to push USD/CAD closer to the 1.30 CAD marker. The cross is up over a full cent to 1.2884 CAD.

The negative sentiment started overnight when the U.S. Treasury released a statement saying it would increase its stake in AIG, allowing the insurance company to draw up to $30 billion in exchange for noncumulative preferred stock on Monday.

In more bad news, the insurance company also announced the largest fourth-quarter loss in its history.

The loonie received some short-term support from a slightly better-than-expected Q4 GDP report. Markets had been preparing for dire results.

Canadian GDP contracted an annualized 3.4% in the fourth quarter, less than the 3.6% decline expected. Third-quarter GDP was revised down to 0.9% from an initially reported 1.3%.

However, currency markets ignored better-than-expected U.S. data, including a surprise improvement in conditions in the manufacturing sector and an unexpected rise in U.S. personal income and spending.

The ISM manufacturing survey, which measures the vitality of the sector, unexpectedly rose to 35.8 in February. The market consensus beforehand was for a decline to 34.0.

Total personal spending, which comprises roughly 70% of U.S. gross domestic product, rose 0.6% in the month, following a cutback of 1.0% in December. Economists had been expecting a rise of 0.4%. Annual spending fell 1.0%.

Currency strategists are expecting currency markets to carry on reacting to risk aversion sentiment. Ashraf Laidi, chief market strategist from CMC markets, said any more pressure on equity markets could propel USD/CAD through 1.30 CAD.

John Hardy, FX strategist from Saxo Bank is also bullish on the cross and expects it to test 1.30.

Euro/USD down 0.74 cents to 1.2595

USD/CAD up 1.26 cents to 1.2886

USD/Yen down 0.08 points to 97.54

GBP/USD down 2.76 cents to 1.4040

AUD/USD down 0.64 cents to 0.6325

Euro/Yen down 0.80 points to 122.88

Euro/GBP up 1.19 pence to 0.8971

GBP/CAD down 1.73 cents to 1.8095

CAD/Yen down 0.80 points to 75.70

Euro/CAD up 0.67 cents to 1.6230

The U.S. Dollar Index is up 0.74 points to 88.75

All data taken at 10:41 a.m. EST

By Neils Christensen, neilsc@economicnews.ca